What Credit Score Is Going to Help You Get a Car Loan?

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If you're trying to buy a new or used vehicle, you may want to finance it instead of paying the full price upfront. It can be confusing to know how your financial information affects your loan details. Lenders use credit scores, or FICO scores, to determine what kind of car loan they can give you.

Credit scores are numbers based on credit scoring models that auto lenders use during the financing process. This number helps them assess your financial situation and determine how to structure your auto loan. Your FICO score can vary depending on various factors.

A bad credit score can affect auto loans. It can increase your interest rates and make the loan more expensive. Having a lower credit score can also make it more difficult to secure financing.

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Credit scores are often big indicators of what kind of car loan you can secure. It can be helpful to better understand what a credit score is and what score you need to get a car loan. Though having a lower credit score can make it more difficult to find the auto loan that works for you, you do have options.

There are steps you can take to improve your borrowing experience. There are also steps you can take to improve your credit score prior to financing a vehicle if you have the time. So what credit score do you need for a car loan? Here's everything you need to know about how your credit score plays into auto lending.

How Do Lenders Use Credit Scores?

Lenders use your credit score as one tool to determine your credit risk. The score helps them learn more about your financial situation and whether you're likely to default on the car loan. Credit bureaus use information about your current credit accounts and credit card accounts to generate your credit score.

Credit scores are numbers between 300 and 850 that represent your credit profile. Though your credit score is an important part of the lending process, it isn't all the lender considers. For example, they may also consider your FICO auto score, which is a number focused on your auto loan risk.

Minimum Credit Score for Buying a Car

The minimum credit scores that are best for purchasing a vehicle can vary depending on the lender you choose. There's no universal minimum credit score. Each financial institution has different qualifications for minimum credit scores when offering auto loans. A new lender may consider your debt-to-income ratio.

The credit union you bank with may consider how long you've been a member. When purchasing a car, the minimum credit score requirement may be around 500. Those with average credit scores lower than 500 can still get financing, but they may have higher rates.

Most used auto loans go to borrowers with minimum credit scores of at least 675. For new auto loans, most borrowers have scores of around 730. The minimum credit score needed for a new car may be around 600, but those with excellent credit often get lower rates and lower monthly payments.

Improving Your Credit Can Lower Costs

Lower credit scores may result in less-than-favorable loan terms for the car you want to buy. Having a car loan with a high interest rate can make it more difficult to pay it off. If you're already struggling with low credit, adding a car loan with high rates may not be helpful.

If you can, consider postponing your car purchase. This can give you more time to improve your credit score. Postponing your purchase can also help you time the market and buy when dealerships have high inventory.

A car loan with high interest rates can make a big difference in your monthly payment. Taking some time to improve your credit can also help you save money in the long term. Lower rates can reduce the total cost of the vehicle by thousands of dollars.

How to Improve Your Credit before Buying

If you can, take time to improve your credit score before purchasing a new vehicle. Even improving your credit score by 50 to 100 points can help to improve your lending options. These are some steps you can take to improve your FICO score before purchasing a car.

Assess Your Report

To improve your credit score, start by assessing your credit report and disputing errors. Your report is the document that contains all your credit information, and sometimes major credit bureaus can make mistakes. They may add the wrong information, which can lower your score, so it's important to dispute any errors you find when assessing your report. You can go to AnnualCreditReport.com for a free annual credit report from each of the three credit reporting agencies: Equifax, Experian, and TransUnion.

Fix Your Credit Mix

Credit mix refers to the different types of credit you have. If your report isn't diverse enough, it can lower your score. Consider taking out different types of credit, like personal loans, to improve your credit mix.

Pay Your Bills on Time

Focus on paying all your bills on time to get a good credit score. Missed payments can lower your score, so one way you can help to improve your score is by making on-time payments. Consider creating a reminder system or setting your payments to automatically come out so you don't forget.

Increase Your Credit Limits

Consider calling your current lenders and asking them to increase your limits. The three major credit bureaus consider what percentage of credit you're using as part of your score calculation. This means increasing your credit limits can lower that percentage even if you don't pay your balances down, which can help to improve your credit score.

Lower Your Balances

Finally, one of the best things you can do to improve your credit is to pay down your balances. Having high balances on your credit accounts can lower your score. The goal is to have your total credit utilization down under 30 percent, as this can greatly help to improve credit scores. Consider taking out a personal loan to reduce your credit card utilization.

How to Purchase a Car with Bad Credit

Cars are essential for many people when it comes to getting to work, transporting kids, and getting basic life essentials. It's understandable that you may need a vehicle if your current vehicle stops working, even if your FICO credit score may increase the interest rates.